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In a move that could bring in more transparency in the term money market and lead to better pricing, treasury officials of banks are planning to come up with a Certificate of Deposit (CD) curve for inter-bank lending and borrowing of maturity tenures up to 1 year.
Currently, CDs are priced through negotiations and the rates are decided according to the demand, supply and credit risks involved.
“This would bring in more transparency and also lead to better pricing. It will also help in the development of a term money curve which is not there currently. This curve may also be used for pricing of Commercial Papers (CPs) and deciding the rates in short-term lending by banks to corporate,” said NS Venkatesh, chief general manager and head of treasury of IDBI Bank.
According to treasury officials, most banks have agreed to this idea and the matter will soon be discussed with the Reserve Bank of India (RBI). This CD curve can be used for tenures ranging from 15 days to 1 year. As per definitions laid down by the central bank, term money deals in funds from 15 days to a year.
The CD curve will be based on the dealt rates on the deal reporting platform of Fixed Income Money Market and Derivatives Association of India (FIMMDA). The CD curve could serve as a benchmark.
Currently, the market has a government securities curve based on similar lines.
Speaking about the advantages of the CD curve Mohan Shenoi, president - group treasury and global markets, Kotak Mahindra Bank said that marked-to-market becomes relevant if CDs are coupon bearing. As per current RBI guidelines, CD issued at a discount on face value need not be marked-to-market. But at the same time the central bank also permits coupon bearing CDs.
According to Shenoi once the CD curve stabilises the market can also get a rupee interest rate swap with 3 month CD rate as the floating rate. As per RBI definition, over-the-counter rupee interest rate swaps are plain vanilla fixed to floating swaps where a market determined benchmark rate is used as the floating rate.
However, few experts are of the view that the proposed idea may not be a success as it cannot be compared with the government securities curve. “There is no credit risk for government securities. Here this curve does not take into account the credit risk involved and the demand and supply factors,” said Ajay Manglunia, senior vice-president, Edelweiss Securities. According to Manglunia this curve can be used successfully if hedging of credit is done through Credit Default Swaps (CDS).
